S&P on Financials: Greater Losses, Tighter Regulation in Pipeline

By Matt Phillips

AP Photo / Mark Lennihan

Once again bank stocks are clustered at their perch atop the New York Stock Exchange high-volume list. Citigroup is leading the declines in the high-volume issues, with a drop of more than 6%. (It’s followed closely by Bank of America, -4.6%.) The KBW Bank Stocks index was down more than 4.5% just before 11 a.m., as the broader S&P 500 stock index slipped roughly 0.6%.

The looming regulatory overhaul — details of which were released today — might have something to do with it. Dow Jones Newswires Columnist Tomi Kilgore notes today that “With financial stocks already teetering on a technical cliff, it’s unlikely investors will find any good news in President Barack Obama’s proposed plan.”

Part of the particularly dour sentiment among bank-stock investors may also stem from a fresh note out from Standard and Poor’s today in which the agency cut ratings on 18 financial institutions. Here’s S&P’s bullet-point breakdown on its reasoning:

· The industry is now in a transition and will likely undergo material structural changes;

· The loss content of loan portfolios should increase, but recent capital rebuilding should help banks defray these losses

· Stress tests point to the likelihood of greater losses in the future;

· Potential losses could increase beyond our current expectations as reflected in the negative outlooks (i.e., a firm’s full potential may not be realized).

Interestingly, S&P analysts also alluded a couple times to the eventual impact of revamped regulation. “We believe the banking industry is undergoing a structural transformation that may include radical changes with permanent repercussions,” they wrote. “Possible changes include increased regulatory oversight, lower profitability, and eventually, higher regulatory capital minimums and stronger governance.”

Correction: A previous version of this post reported that S&P cut credit ratings on 22 financial institutions. The agency only cut ratings on 18.

Comments (1 of 1)

The S&P 500 Stock Index has a P/E Ratio of 17.8 as of 5/31/09, according to Vanguard.com The 200 day SMA (Simple Moving Average) has been on the decline since last year. In contrast, major stock indexes have only recently climbed above the 200 SMA as of June 1, 2009. How then can stocks continue to increase above the long term moving average? Obviously, many of them won't be able to maintain current valuations, increasing the probability of a Summer Correction (and you thought school was out).

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